Archive - Oct 14, 2010
Daily recap of main FX pair action, including currency heatmaps.
RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 14/10/10
A seemingly logical explanation for why a weakening USD/CNY will lead to a weaker USD in a closed loop from Faros Trading: "When USD/CNY drops, the USD/Index also drops. The relationship collapsed in mid 2008 when the CNY was pegged to the USD, but was re-awakened in mid 2010 when China reverted to ‘flexibility.’ The concept of ‘balance’ as defined by Finance Ministers is the area the market was trading pre-Lehman collapse in mid-2008. Based on the above chart, this puts ‘balance’ at an area where the USD/Index is anywhere from 7-9% lower. One of USD/Index lows was in 2008; at the point when USD/CNY was pegged back to the dollar. The central reason we have for USD weakness is the causality of CNY flexibility against the USD/Index, with the added fuel of the Fed QE2. Demand for dollars drops as China moves USD/CNY lower, and the supply of dollars rises as the Fed QE2's. With both the supply and demand curves moving at the same time, this move will be faster and more direct. Hold the line in short USD positions."
Guest Post: Why Is the White House Against Freezing Foreclosures? A Look At The Fed's Suddenly Worthless Trillions In MBS HoldingsSubmitted by Tyler Durden on 10/14/2010 14:47 -0500
The real reason for Geithner’s reluctance about a foreclosure moratorium is that he’s scared stiff about those securities – because even if he won’t admit it, he knows that the bailout wasn’t just about TARP and Bernanke isn’t just an economic savior. The government owns or is backing trillions of dollars worth of assets predicated on the same or similar suspicious loans that defaulted during the 2008 crisis period, which they did nothing to stop (or force banks to restructure). Instead, the Fed now owns nearly $1.5 trillion of toxic assets that have no bid (meaning no one but the Fed wants them). They would have less of a bid if there was even more uncertainty about the loans that fill them. The Treasury is directly backing $400 billion of government-sponsored entity (GSE) securities, and is indirectly backing another $6.8 trillion. If foreclosed homes couldn’t be sold because of fraudulent paperwork or had to wait for more detailed inspections, you can imagine how difficult selling assets stuffed with faulty loans might be. If it’s tough to find a title for a foreclosed home, think how tough it is to back the related loan out of a pyramid of securities sitting on top of it. - Nomi Prins
Even as JPM Jamie was crowing earlier about how great JPM's feces smell, and how the future is so bright, he's gotta wear Dimonshades, a little yet very important headline hit Bloomberg. To wit:
BN *JPMORGAN $1.25 BLN 30-YR DEBT MAY PAY 165 BASIS-POINT SPREAD
BN *JPMORGAN $2.75 BLN 10-YR DEBT MAY PAY 180 BASIS-POINT SPREAD
Unfortunately, surreal stories like this will very soon become daily news. As was pointed out yesterday, Simi Valley has just seen the first case of a forced reclamation of a foreclosed home, after Jim and Danielle Earl took their nine (9!) children, ages 9-23, and a locksmith and broke into the six-bedroom house that had been foreclosed upon for lack of payment, and on which the couple owed $880,000! And where would such brilliant advice originate from? Why, the couple's lawyer of course, who will one day be seen as the prophetic visionary who stole the bankers wealth from underneath them and handed it out to America's millions of starving lawyers, one billing sheet at a time: "The move was recommended by their lawyer" as the WSJ suggests. Already in process: millions of cases identical to this one, billions in legal fees, and hundreds of billions in lost market value of associated equity and credit instrument, not to mention very unpleasant days for LPs in "Recovery" funds.
Yesterday we highlighted that US TIPS securities are trading with negative yields almost 6 years into the future. The chart below shows just how great the confusion is when it comes to estimating inflation based on a comparison between rate-based instruments and other securities, most notably stocks and commodities, which are now pricing in aggressive inflation. Yet this is nothing compared to the confusion when attempting to quantify European inflation is even worse. And lastly: Britain is now expecting inflation to not return for nearly a decade based on TIPS breakevens.
Devaluing the dollar by 12.5% costs US Citizens $3.75Tn of their Dollar-denominated assets in the past 5 months and even if we did hire 1.2M factory workers because it boosted exports (it didn’t and we didn’t), that would still be costing us over $3M per job!
BN *`WE WISH WE HADN'T DONE' DIVIDENDS AS ECONOMY FADED: BOFA CEO
insert riotous laughter here
Without an economic incentive to foreclose, it would not be in the bank shareholders best interests to pursue foreclosure even though borrowers clearly defaulted & owe money to the lender. In this scenario, even Tyler Durden, whose controversial ZeroHedge site I read and contribute to with a passion, is being too optimistic. Yeah, that’s right! You know things are bad when ZeroHedge is too optimistic! I want all to keep this in mind when pondering the release of reserves by the banks. My JPM quarterly review is still on its way, and I will share a substantial amount with the public.
Is this the gray swan? The 30 Year auction just came in at 3.852%, which in itself is not remarkable, although as the highlight on the chart below shows this was an inflection point in the high yield which for the first time came in higher than the previous auction (3.82%), and could be the critical rate rise everyone is expecting. And with the 10s30s at record highs (how is that flattener MS/BofA?) this pretty much shelves any hope for America to follow in Mexico's footsteps and issue 100 Year notes. What is most troubling is that even as all other auctions keep coming at tighter and tighter spreads, the 30 Year has decidely broken away from the pattern. And the Auction itself was ghastly: the Bid To Cover was 2.49, the lowest it has been since February, and would have been far worse had Primary Dealers not singlehandedly carried it on their shoulders. PDs took down 58.6% of the auction, the highest since May of 2009! And, as we feared, Indirects are no longer chasing for yield, but are demonstrating to the US what happens if and when America decides to go into trade and currency war mode unilaterally. At 32.4%, Indirects took down the least amount since March. If the yield on the 30 Year continues to rise, this, much more so than a failed auction, will be colored swan that Zero Hedge has long been looking for. Keep an eye on the 10s30s. If it goes parabolic here, it could get very ugly, very fast.
As people finally realize that there is no getting away from a self-imposed (or sent from above) foreclosure moratorium reality, the next question is the quantification of what the hit to banks will be. As bank stock shares are demonstrating today, it will be substantial and is already starting to be priced in. According to FBR's Paul Miller, as cited by Bloomberg, "faulty foreclosures may cost U.S. lenders $2 billion for every month that home seizures are delayed and the tab could reach $6 billion... Investigations of how banks are seizing homes may prolong foreclosures by as much as three months, at a rough cost of $1,000 per month for each property in the pipeline. The biggest firms likely need to add staff to comb through the files, costing them each $1 million a year." This is a very a modest estimate. More importantly, a separate study by SNL Financial has determined that the total amount of residential (not commercial) mortgages in foreclosure between directly serviced, and those serviced for others, for the big three banks alone (JPM, WFC, BAC) is nearly a quarter of a trillion dollars! And this number will soon surge. Keep in mind, as we disclosed yesterday, per JPM, the bank, which is a good proxy of the Big 3, keeps mortgages in the delinquent category for on average of 448 days before moving to foreclose (and 678 days in Florida and a stunning 792 days in New York). This means that banks, and especially regional banks, are about to experience the mother of all delinquency-to-foreclosure cliff events, as squatters now certainly will have no intention of ever paying down their mortgage. Which also means that the quarter trillion in foreclosed mortgages are about to explode by orders of magnitude. The hole could end up being as large as a trillion if one throws in the CMBS properties that are delinquent and in foreclosure ($61 billion in August per RealPoint). And poof, there goes the trillion dollars currently sitting in cash and doing nothing (as well as a generous helping of excess reserves) for now... but not for much longer.
First thing yesterday, when we first highlighted that CDS in mortgage names were blowing out, even as the moronic market was all giddy on JPM's earnings beat which was really a miss, we warned "be careful trading financial stocks: JPM's earnings were actually very bad, and so far only credit has figured it out. Equities, being traded now exclusively by Fed-frontrunning retards and virus-infested robots, are a little slow." Prophetically, the equity slowness has finally caught up with reality, and BofA and Wells stocks are tumbling. Alas, fins have much more to drop, especially if and when the RMBS and CMBS markets are gutted (incidentally that CMBX III-IV AJ is looking like a screaming short right here, right now). Below is that latest CDS fin rerack - it is a bloodbath.
The reason why I think the chatter of a Plaza 2.0 is so compelling right now is because we have only two choices left. We can devalue in a disorderly and completely chaotic fashion, or we can agree to do it in a more measured and sane manner. A massive QE2 program would be the chaotic choice and would lead to total and complete monetary and economic destruction throughout the world. This is what people have been referring to as the currency wars. I actually think that Bernanke’s threat to QE2 to infinity has scared some of the emerging market leaders and central bankers straight; as it should. At this point it is in everyone’s best interest to come together and say ok, the dollar needs to be devalued but it needs to be devalued versus all major currencies more or less simultaneously. The truth of the matter is this. With commodities surging and the CRB RIND Index (the spot price for 22 sensitive basic commodities) at an all time high, the booming economies in Asia and elsewhere in the emerging world are experiencing horrific inflation that is much worse than the official statistics demonstrate and this creates an environment where currency appreciation is a necessary tool to keep prices under control. The BIG problem here is that they are wary to allow significant strengthening as long as the yuan remains static. No one wants to devalue while China sits there and does nothing. On the other hand, I believe they would all be very willing and content to allow a major appreciation versus the dollar if China comes along for the ride. - Mike Krieger
RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 14/10/10